(*) Since 1994, the Estonian balance of payments is compiled on the basis of the 5th edition of the Balance of Payments Manual (IMF, 1993). Therefore, the structure of the balance of payments of earlier years has been adjusted accordingly.
The change in reserves has been separated from the capital and financial accounts, and made a separate account in the overall balance of payments. Such a distinction should provide a clearer picture of the capital and financial deals during a given period of time. Adding up the balance of the current account and the balance of the capital and finance account, as well as errors and omissions, we will get the overall balance which provides the whole balance of capital in- and outflow. The change in reserves equals in size to the overall balance, with the opposite sign, as the balance of payments has to equal to zero, that is, it has to be in balance.
After receiving additional information, data of the earlier periods in the balance of payments has been updated accordingly.
Unlike 1993, the current account of the balance of payments was in deficit throughout 1994 (see Table 1). This was directly caused by the foreign trade deficit. Changes in the current account of the balance of payments and the foreign trade balance are given in Figure 1.
(**) In the balance of payments the export and import of goods is given in f.o.b. prices; that is, the transport and insurance costs of imported goods are included in the balance of services. In some tables on foreign trade, import is given in c.i.f. prices.
The growth of import outstripped that of export in 1994, leading to the trade deficit becoming greater, particularly in the fourth quarter of the year when the imports of machinery and equipment and products of chemical industry and plastics increased rapidly (see Figure 2). These two categories of goods, together with mineral products (mostly fuels), are the main reason for Estonia's foreign trade deficit (see Figure 3).
(***) The foreign trade analysis does not reflect the addenda made to the foreign trade balance by the Department of the Balance of Payments of Eesti Pank.
The turnover of Estonian foreign trade increased 1.7 times in 1994 as compared to the previous year (import is given in c.i.f. prices; see Table 2). The most rapidly increasing groups of goods were timber, paper and products thereof, as well as products of chemical industry and plastics, machinery and equipment. Increase was slow in the turnover of transport vehicles. As to their relative importance, foodstuffs still occupied the leading position in the trade turnover of 1994. Machinery and equipment took second place, formerly occupied by clothing, footwear and headgear.
The signs of the trade balances of different groups of goods remained the same in 1994 as they were in 1993, deficit increasing and surplus decreasing. The only exception was timber and products thereof and furniture which showed a growing surplus. While in 1993 the exports and imports of foodstuffs had the biggest surplus, then in 1994 timber and products thereof had.
The volume of export increased last year 1.6 times against 1993. The most rapid increase occurred in such groups of goods as products of chemical industry, timber, paper and products thereof, as well as machinery and equipment (see Table 3and Figure 4). Increase in the exports of transport vehicles and metals was below the average.
The most important export article in both 1993 and 1994 was foodstuffs. Within this group, the share of animal products (meat, fish, milk) decreased while the share of food industry products (sausages, preserves, beverages) increased.
Increase in the exports of clothes mostly resulted from Sweden and Finland bringing more textiles to Estonia for finishing. The most important change in the structure of export was, however, the decline in the share of transport vehicles and increase in the share of timber. While in 1993 the bulk of timber exports was unprocessed lumber, then in 1994 the share of sawn timber increased rapidly. Of products of chemical industry, mostly inorganic chemicals, medicines, fertilisers, detergents and perfumery and cosmetics were exported. Various radio and television and computer components accounted for a large share of the exports of machinery and equipment.
Import increased 1.8 times over the past year (in c.i.f. prices). The most rapid increase was recorded in the imports of timber, paper and products thereof (see Table 4and Figure 5). The imports of products of chemical industry, metals and machinery and equipment increased at a higher than average rate. The imports of transport vehicles increased the least, faring similarly to exports. One may conclude that the boom in car trade (import-re-export of used cars from the West to the East in particular) is coming to an end in Estonia's foreign trade.
In both 1993 and 1994, the biggest share in Estonian import was held by machinery and equipment. Last year the volumes increased to one-fifth of total import. The share of communications equipment and computers was the largest within this import group.
In the structure of foodstuffs (that is on the second place) the share of animal products, vegetables and fruit and beverages increased a little. An important role in imports still belonged to mineral products (mostly fuels). In the imports of products of chemical industry dominated medicines, perfumery, cosmetics and detergents.
The ranking of the first seven countries in the list of Estonia's major trade partners did not change in 1994 (see Table 5). The shares of the first two - Finland and Russia - were practically the same. In the overall turnover, the share of Sweden, Lithuania, Denmark, Great Britain, Belgium, Belarus and Italy increased, while the share of Germany, Latvia, the Netherlands and the United States decreased.
There was a tendency for the trade balance to be in deficit in regard to developed Western countries, and in surplus in regard to the former Soviet republics. The exception here is Great Britain. Estonia's biggest trade surplus was in respect to Latvia.
Estonia's most important export partner in 1994 was Russia. Export to Norway, Great Britain, Belarus, Belgium, Lithuania, Denmark and Italy increased rapidly as did the share of these countries in total export volume. Export also increased to Finland, Germany, the Netherlands and Ukraine but the growth rate remained well below the overall growth rate and thus revealed a slight decline in the share of these countries in Estonia's total export (see Figure 6).
The position of Estonia's main import partner Finland strengthened further in 1994. Almost 40% of total imports passed through Finland. Due to this, trade deficit with Finland increased 2.4 times last year. A greater than average increase was recorded in import from France, the Netherlands, Denmark and Great Britain; less from Belarus, the United States, Lithuania and Latvia (see Figure 7). Last year, 66% of mineral fuels imported came from Russia, including 70-90% of imported black oil and diesel fuel, and 100% of imported piped natural gas.
The surplus in the balance of services increased by approximately one-third in 1994, and total turnover increased more than 1.5 times as compared to 1993. The increase of both exports and imports of services was relatively stable in every quarter of the year (see Figure 8).
Despite its rapid increase, the services balance of payments turnover only made up slightly more than one-third of the foreign trade turnover. The ratio was the same in 1993 too, but at that time, the surplus of services was used to cover the foreign trade deficit and, as a result, the current account had been in surplus. In 1994, the surplus of the services balance of payments was insufficient to compensate for the constantly growing foreign trade deficit.
No significant changes took place in services last year. Among the various categories of services, the most important role still belonged to international freight services and travel, which accounted for 57% and 15% of the total turnover, respectively. The share of other categories of services remained below 10%. Surplus of the balance of transport, travel and construction services continued to support the current account. The imports of other services exceeded their exports (see Table 6).
Transport had the largest turnover among services in 1994. 4.4 billion kroons worth of transport services were exported while 2.4 billion kroons worth were imported. Compared to 1993, the turnover of international transport increased 47% and net profit from it increased 52% (see Table 7and Figure 9).
In comparison with 1993, the share of freight services increased from 44% to 53% in the total turnover of transport. Freight services accounted for 49% of the transport balance surplus. The export-import balance of freight services did not increase much since import more than doubled while export increased only 59% last year. Although the exports of air and road freight services increased in 1994, sea freight decreased 36% in the third quarter as compared to the second quarter, which was more than one-tenth less than the credit turnover of the sea freight turnover in the first quarter. This was due to the double decrease of sea freight services caused by a near-complete disruption of Russian grain transit through Estonian ports.
The share of sea freight decreased from 83% in 1993 to 77% in 1994 in the total turnover of freight services. At the same time, the share of road freight services increased from 16% to 25%. Although the share of air freight increased in the fourth quarter, it still accounted for only 1% of the total freight services turnover.
In 1994 passenger transport services were more profitable for the Estonian economy than a year ago. So far the exports of passenger services has outstripped imports nearly four times and the growth rate of exports has been more rapid. The ferry disaster at the end of the third quarter had no significant impact on passenger transport overall. However, since non-resident shipping companies are likely to enter the Estonian market in 1995, an increase is expected in the imports of passenger transport services, which will in future make this service less profitable for Estonia. Although the share of passenger services (18%) was the smallest among transport services in the 1994 total transport turnover, the net profit earned from it was 38% of the surplus of transport services. Eighty per cent of the passenger transport turnover came from sea transport. The shares of air and road transport were 15% and 5%, respectively. An important change occurred in the fourth quarter when a decline in the sea transport led the share of the air transport to double.
In 1994, servicing of international transport became profitable for Estonia. Like in the case of freight services, the exception here was the third quarter, when exports decreased 45%. This was a direct result of the decrease in sea transit which led to the fall in port fees, factor, loading and unloading payments. The turnover of other transport services accounted for 30% of the total turnover of transport services in 1994 but gave only 14% of net profits.
The share of the different kinds of transport in the turnover and balance of transport services in 1994 is shown in Figure 10.
In 1994, the turnover of travel services increasing 80% as against the previous year had a significant impact on the services account. In comparison with 1993, exports increased 77% and imports 84%. As before, the exports of travel services outstripped imports nearly twice and accordingly, the surplus of the balance of travel services increased with every quarter (see Figure 11).
Since travel is inherently seasonal, the profits earned in the third and fourth quarter due to holidays and Christmas trips were more than twice larger than the profits of the first and the second quarter. More than half of the tourists who visited Estonia used the services of travel agencies while Estonian tourists mostly travelled abroad without the mediation of travel agencies.
Although Estonia makes money from its tourist attractions and nature, being a new and interesting travel target, an important share of the profits made from travel comes from shopping. This is due to Estonia's favourable price level compared to some neighbouring countries. In 1994, 80% of tourists who visited Estonia came from Finland, and at least half of them are believed to have come for shopping reasons.
The most important among other services in 1994 were construction, communications and insurance. The increase of turnover was the highest in construction - 150%. Due to construction projects in Russia and other CIS countries there was a surplus in construction accounts.
As in 1993, the account of insurance services was lopsided last year, the exports of insurance amounting to 7.3 million kroons and the imports to 152 million kroons. The turnover increased 142% last year.
In general, we can say that the increase in the exports and imports of services was relatively stable last year. The exception was the decline in sea transit and the rapid increase of travel services in the third quarter. This resulted in the increase of net income from travel and passenger services. Although the latter was quite significant, it was insufficient to compensate for the decline of income from freight and related services and therefore, the surplus of the balance of services diminished in the third quarter.
In 1994 the deficit of the income accounts doubled (see Table 8).
The influx of income was relatively stable in different quarters and resulted mostly from interest and capital income earned from investments abroad. Since up to now the direction of investments has been fairly lopsided - from abroad into Estonia - the income earned from these investments has mostly been moving out of the country. The increase of capital income testifies to the profitability of investments made into Estonia.
Interest paid on state loans accounted for 9% of the money taken out of Estonia.
In comparison with 1993, the surplus of balance of transfers increased last year, amounting to nearly 1.5 billion kroons.
In most cases transfers to Estonia were foreign aid, which in goods and services combined amounted to a total of 1.3 billion kroons. The rest was current transfers of the government and private sector (army pensions, inheritances, etc.).
The sums of transfers from Estonia abroad have so far been relatively small (73 million kroons in 1994) and mostly concern the movement of money in the private sector.
The balance of the capital and financial account was in surplus in 1994, although a deficit was recorded for the first time in the third quarter.
The deficit of the capital account was mostly conditioned by subventions paid to people who left Estonia permanently.
The surplus of the financial account resulted from direct investments into Estonia. However, more capital moved out of the country as portfolio and other investments than came into Estonia.
In 1994, non-residents invested about one-third more money in Estonian companies than the year before. More than half, or 68% of the foreign investments were made in the first half-year. Investments made from Estonia abroad amounted to a mere 30 million kroons, or one-third of the corresponding 1993 figure. Due to the positive balance of the flow of direct investments, the finance account's surplus was enough to cover the deficit of the current account and guaranteed the surplus in the overall balance.
A survey of direct investments into Estonia is given in Table 9and Figure 12. Analyzing them by their main components, we can notice several important features. Compared to 1993, the sums invested in new companies decreased somewhat, while the flow of foreign capital to existing companies increased three times. The volume of re-invested income also increased considerably. This attests to the continued interest of foreign investors in Estonia and the profitability of the investments.
In 1994, investments into capital stock accounted for 67% of the total direct investments. Of this, 64% arrived as capital stock into already established companies. Nineteen per cent of direct investments was re-invested income, 13% loan capital and 1% was investments into real estate.
While the share of capital stock in direct investments increased against 1993, then the share of loan capital (the balance of claims and obligations of direct investors) in direct investments has been decreasing quarter by quarter.
Obligations to direct investors decreased mostly due to an increase in repayments of long-term loans in the fourth quarter of 1994. The total of long- and short-term loans exceeded repayments by 350.5 million kroons. Debts of trade credit to direct investors increased 121.3 million kroons. Thus, the increase of obligations increased direct investments by a total of 471.8 million kroons, which is 163 million kroons less than in 1993.
Compared to 1993, claims on direct investors also decreased, consisting mostly of the trade credits of non-residents owed to residents, and of short-term loans to direct investors.
A survey of the structure of direct investments by different countries is given in Figure 13. The bulk of direct investments still came from Finland and Sweden, which accounted for almost half of direct investments into Estonia last year. Russia held the leading position in investments made into voting capital stock. This indicates the higher sensitivity to risk of Western countries which preferred investments in the form of loan capital rather than capital stock.
The bulk of investments was made into industry, both in the form of whole direct investments and capital stock. Nearly one-fourth of direct investments was made into the transport sector, although investments into the capital stock of this sector amounted to only 4%. Investments into wholesale and retail trade were also significant (see Figure 14).
As in 1993, more money went out of Estonia through portfolio investments last year than came in. But the turnover of portfolio investments increased considerably.
A significant change in the movement of portfolio investments took place in the third quarter of 1994. First of all, foreign securities were bought directly, without brokers at investment funds as it had been done earlier. Preference was given to freely-traded Finnish and Russian securities. The second new feature was the expansion of the capital stock of Estonian commercial banks through foreign portfolio investments.
The balance of other investments was in deficit in 1994, mostly due to the outflow of short-term capital in the banking sector. The balance of other investments in other sectors was in surplus.
Commercial banks transferred more than 1.2 billion kroons worth of cash and deposits abroad over the last year. There were three main reasons for this. First, the regulations on the banks' reserve requirement were changed in 1994 so that the investment opportunities of banks broadened. Secondly, the resources at the disposal of the banks (deposits, for example) have been constantly increasing, while there are not enough lucrative investment opportunities in Estonia - the number of good loan projects is not increasing at the same rate as are reserves. Thirdly, the volume of foreign transactions of Estonian commercial banks is increasing with every month. While in January 1994, the Estonian banking sector handled 2.4 billion kroons worth of international payments, then by December the volume had increased to 4.7 billion kroons. This forces the banks to increase the amount of money held on their correspondent accounts abroad.
The balance of other investments in other sectors was in surplus thanks to a short-term influx of capital to Estonia which outstripped the outflow of long-term capital. The biggest impact on short-term capital came from the trade credit, the obligations of which exceeded claims by more than 375 million kroons. In comparison with the beginning of 1993, when Estonian companies had trade credit claims on non-residents for approximately 340 million kroons more than obligations, one could say that Estonian importers have earned the trust of their foreign partners and no longer have to make large advance payments for the goods they buy. The positive balance of short-term capital was also related to the fact that Estonian companies and private individuals transferred more cash and deposits from foreign accounts to Estonia than they took out of the country, unlike in 1993. This attests to the increasing trust in the Estonian banking sector.
The outflow of long-term capital in other sectors was mostly caused by long-term leasing of ships and trucks from abroad. Another reason was repayment of long-term credits received by Estonian companies from abroad. In 1994 as well, more short-term loans were repaid than received outside Estonia. This indicates the improving solvency of Estonian businesses.
The influx of other forms of capital to Estonia mostly occurred in the form of long-term loan capital from financial institutions and the public sector. In 1994, 508.8 million kroons of loans received through the Eesti Pank, the Estonian Government and the Estonian Investment Bank, were used - more than twice less than in 1993.
This was partly due to the fact that in 1993 three large loans were received - from the European Union, the first loan of the AB Svensk Exportkredit and the IMF STF loan - worth more than 650 million kroons in total. The utilisation of other loans will take place in phases and over a longer period. All major 1994 loans were usable in instalments and over several years. The loans were mostly used for the purchase of machinery and equipment. Part of the money was used for an energy conservation programme and to finance the reconstruction of Tallinn Airport.
Repayments of state-guaranteed loans amounted to 58.3 million kroons in 1994. The bulk of this sum went to repay the loans of the Finnish Exportcredit Ltd and the US Ministry of Agriculture.
The increase of reserves continued in 1994, though at a somewhat slower rate. In the third quarter, reserves even decreased slightly. This slow-down was inevitable since the deficit of the current account has increased more quickly than the surplus of the finance account.Balance of Payments Department of Eesti Pank